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Page added on June 6, 2016

Demand destruction and peak oil

We are fully under the influence of petroleum demand destruction. The global oil market can’t function without real oil production price discovery, which doesn’t exist in the currently deflationary global economy, which forces indebted producers to sell far below cost.

Both supply and demand seem to cyclic in nature and we are not finished with the supply destruction phase, which can only be revived through a globally realistic oil trading price, which nobody knows. This is an unknown until demand destruction also runs its course. The global demand in the oil supply-demand balance that sets the global oil price cannot be known until we can understand where the global economy is headed. The global material economy seems to be contracting as the Baltic dry index, trucking, and railroad profitability seem to affirm, even ignoring oil prices and Chinese economy.

The reality is probably that a falling EROEI and the end to cheap oil after ~2005 made our finance capital investment growth less profitable. But this fundamental shift has been hidden through easy central bank credit and fiat currency generated on demand to pay interest on a growing mountain of unpayable debt, with a shift of debt from private hands to public, such as away from Wall Street toward Fed and US Treasury obligations. Now we see the world’s major central banks each independently creating their own fiat currencies to preserve a trading advantage, led by the dollar as the world’s standard reserve currency. (if it were up to me, things would work out a lot better if each dollar would be exchangeable on demand for a quart of conventional oil)

Under current conditions, nobody can predict a meaningful exchange rate for the major currencies trading on the key foreign exchange market; the trade exchange rates and pegs are established through national politics and are thus arbitrary, which leads to Triffin’s paradox. National sovereign bank policies tend toward easy money, more debt, and business as usual. Global trade generates its own pressures that necessarily, for the sake of stability of global trade, have to be soundly based on how much energy, labor, and investment capital really went into the production of the goods being exchanged. Here the trends don’t look so good.

http://www.oftwominds.com/blogapr16/triffins-paradox4-16.html

It looks like a system that tends to resist change and internal pressure for reform until things break down into a sort of a global version of a “Minsky moment” where financial guarantees behind finance break down like a domino effect, think late 2008 before the emergency bailouts. Trying to predict how far an out-of-balance system can be pushed before it breaks down or stalls out is impossible.

When this happens, there is no reason to expect an orderly contraction toward the lower energy supply and demand balance needed to encourage new oil investment. It may look more like a chaotic price increase in a world full of angry oil junkies fighting over the existing production. Or maybe it already is that way more than we would like to admit.

Back to oil economics. Following is a nice analysis of when we might expect the next oil price spike, considering the current trends. Perhaps in early 2018 as this estimates? I have seen others guess maybe 2017 for a slow return to a tight global oil market. At any rate, this analysis gives appropriate credit to the many things that can go wrong in the meantime. This has a useful geopolitical account of the various global oil production regions, including Art Berman’s rather discouraging Permian shale oil profitability map.

http://attheedgeoftime.blogspot.co.uk/2016/05/this-is-peak-oil.html

Jeffrey Brown makes the very important point that special attention should be focused on the higher boiling fractions of petroleum known as distillate. You can crack big hydrocarbon (distillate) molecules into little ones during refining, but you can’t (affordably) go back the other way to make the little ones into big ones.

The problem here is that what we might call the raw mobile muscle power for our civilization and its trade rests critically on the availability of these bigger distillate molecules that mostly come from conventional oil. Trucks, planes, airplanes, ships and heavy equipment mining won’t work using the smaller hydrocarbon molecules that predominate in gasoline. These lighter fractions tend to be favored in tight oil due to the geology and physics involved.

For this reason, whenever we do see oil production price discovery again due to the return of a tight global oil market, if operating under orderly market conditions, we should expect to see it expressed as a global fuel price shift. One where distillate price rises stubbornly, relative to the price of lighter fuel fractions like gasoline.

Roger Baker is a transportation and energy reform advocate based in Austin, Texas. Long time member of ASPO

Cassandra’s legacy

32 Comments on "Demand destruction and peak oil"

penury on Mon, 6th Jun 2016 9:35 am

Demand destruction is an ongoing condition. The consumers are slowly being drained of all assets. Wars are bad for humans and other living beings but absolute death to infra-structure. Mass migrations will add stress to the economies of the receiving nations and destroy the health of the nations they are leaving. Habitat destruction is on-going and increasing, so all told peak oil? Who cares? Humans are going away. Hip Hip Hooray.

yoshua on Mon, 6th Jun 2016 10:11 am

Ben Bernanke, former US Fed chairman: ‘The problem with QE is it works in practice, but it doesn’t work in theory.’

At least they tried to break the laws physics.

Davy on Mon, 6th Jun 2016 10:31 am

Yos, it worked great and as it was supposed to like taking xanex for a severe and life threatening panic attack. The problem is they turned a policy that should have been short term and a emergency measure into a long term maintenance policy/drug. With that came the moral hazard that ensured it would never end.

Parties that benefited from these policies were never going to allow them to end and the real pain of healing begin. Now we are at the end facing economic deflation from excessive debt that is destroying demand. This is the economic end game right here right now.

rockman on Mon, 6th Jun 2016 10:55 am

“You can crack big hydrocarbon (distillate) molecules into little ones during refining, but you can’t (affordably) go back the other way to make the little ones into big ones.” First it can be done affordable in some cases. Second refineries are not efficient cracking heavy oils. IOW doing so is typically “not affordable”. US refineries find it much more “affordable” to crack oil in the 31-33 API range. Which is why the lighter oils have always been required. Before the shale boom US refineries imported a lot of distillate to blend with the heavy oils.

This is also why eastern Canadian refineries have bought hundreds of millions of Eagle Ford light oil at WTI prices AND paid to ship it halfway around the continent. And without Canadian and US imported distillite to blend with the oil sands we would have imported very little: of the millions of bbls of oil sands we import everyday about 25% is actually distillate. Last number I saw the Canadians were importing 130 MILLION BBLS OF US DISTILLATE PER YEAR to make the dilbit (diluted bitumen) they export to the US since they lack sufficient production of the “unvaluable” light oil.

The global production of refinertrefinerty products would suffer greatly if the supply of distillate disappeared tomorrow. It is, and always base been, vital to the process. In fact as the world is forced to use increasing amounts of poorer quality heavy oils distillate production is become more important.

rockman on Mon, 6th Jun 2016 10:55 am

marmico on Mon, 6th Jun 2016 12:41 pm

PODMAN doesn’t understand the difference between extraction (condensate) and distillation (distillate). ROTFLMFAO

yoshua on Mon, 6th Jun 2016 12:47 pm

Davy, I just wonder if they had any choice ?

Davy on Mon, 6th Jun 2016 1:05 pm

Yos, they really didn’t because the global economy was shutting down. There was a window of change where a recession could have been allowed. They could have cut off the QE and held interest rates higher. A recession was needed to flush the bad debt out. Instead we got the China bubble and the shale bubble both of which are now killing demand via deflation.

yoshua on Mon, 6th Jun 2016 1:42 pm

Ok. Tough decisions.

shortonoil on Mon, 6th Jun 2016 1:50 pm

“The reality is probably that a falling EROEI and the end to cheap oil after ~2005 made our finance capital investment growth less profitable.”

Between 2005 and 2016 the ERoEI of petroleum (at the well head) has fallen from 11.7:1 to 8.7:1. It now requires, on average, 34.6% more energy to extract a barrel of oil than it did 11 years ago. That is energy that is not going to the general economy because it is now being used to extract the oil. As the general economy starves for the energy that is provided by petroleum, the general economy contracts.

The shrinking demand equation is self explanatory!

http://www.thehillsgroup.org/

shortonoil on Mon, 6th Jun 2016 2:18 pm

If the average producer was replacing the reserves that they are extracting, their full life cycle production cost would now be $125/ barrel. That would amount to 5.8% of the world’s GDP. 5.8% to just pump the oil. The world can no longer afford to maintain the age of oil. Once existing reserves are depleted production will cease.

http://www.thehillsgroup.org/

dave thompson on Mon, 6th Jun 2016 3:40 pm

I think the next spike in oil price say $100-$150 range will most likely end what we call modern industrial civilization. There can no longer be a balancing point of price between production and consumption. Growth as we have known it is over. The energy that fuels the growth no longer exists in quantities affordable to all spectrum, of the human modernity. We are witnessing the effects of depletion and peak oil.

yoshua on Mon, 6th Jun 2016 3:52 pm

short, does it make any difference if the crude is produced by cannibalization of other energy recourses ?

Or is it the amount of BTU that goes into crude production and the amount of BTU delivered to the general economy that matters in the end ?

On the other hand all energy production is dependent on the cannibalization of crude.

If it is the BTU that matters in the end, then is the energy intensive production of heavy oil and oil sands just making matters worse and speeding up the depletion of conventional crude ?

shortonoil on Mon, 6th Jun 2016 6:35 pm

“short, does it make any difference if the crude is produced by cannibalization of other energy recourses ?
Or is it the amount of BTU that goes into crude production and the amount of BTU delivered to the general economy that matters in the end ?
On the other hand all energy production is dependent on the cannibalization of crude.
If it is the BTU that matters in the end, then is the energy intensive production of heavy oil and oil sands just making matters worse and speeding up the depletion of conventional crude ?”</i

Apparently oil production is already being subsidized from other sources. In 2015 petroleum production, including its products, required 9.2 quad BTU more energy than it provided to the general economy. We assume that mostly came from other energy sources.

That 9.2 quad BTU represents $1.2 trillion. Those are losses that will have to be made up somewhere. Presently most of it is coming from the consumption of producers reserves. As we have been stating for some time the high energy producers would be phased out first. Those include shale, bitumen, ultra deep water, arctic and extra heavy. Any liquid hydrocarbon that can not supply a sufficient amount of energy to the general economy to power economic activity at least equal to its cost of production is operating at a loss. The five above fall into that category.

Boat on Mon, 6th Jun 2016 10:19 pm

Rig counts went up 9 last week at $50 oil. Hmmmmmm why would they be increasing drilling if they are operating at a loss.

GregT on Mon, 6th Jun 2016 10:53 pm

Baker Hughes Rig Count Overview & Summary Count

Area——US

Last count——June 3/16

Count——408

Change from prior count—-+4

Change from last year -406

makati1 on Mon, 6th Jun 2016 10:58 pm

Nice rebuttal, with facts, Greg. ^_^

GregT on Mon, 6th Jun 2016 10:59 pm

http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsoverview

GregT on Mon, 6th Jun 2016 11:07 pm

BHI: US rig count rises for first time in 2016

“Financial services firm Raymond James & Associates Inc. said in an industry brief this week that it believes “the US rig count is currently at or near the bottom and a modest recovery is in store for the back half of 2016”

“However, the firm doesn’t forecast a strong recovery resembling that of late 2009 and 2010 when the count nearly doubled from a low of 876 on June 12, 2009—the previous low point in BHI recorded data before the current downturn officially pushed the count below that level in March.”

“Factors slowing recovery will be producers and contractors first focusing on repairing their balance sheets, labor constraints following the large-scale industry layoffs, and equipment attrition, particularly in the area of pressure pumping, RJA says.”

“Separately, the US Energy Information Administration estimated US oil production for the week ended May 27 averaged 8.73 million b/d, down 32,000 b/d from a week ago and down 851,000 b/d year-over-year (OGJ Online, June 3, 2016).”

http://www.ogj.com/articles/2016/06/bhi-us-rig-count-rises-for-first-time-in-2016.html

Yup, everything is coming up roses Boat.

theedrich on Tue, 7th Jun 2016 12:38 am

The time of the Peak is a function of price, the affordability of which Gail Tverberg has shown to be dependent on debt. Given that the cloud of charades, lies, obfuscations and other disinformation dished out by governments worldwide is impossible to penetrate, no one can tell the actual year of the Hump. Nonetheless, based on Gail’s work, it appears to be ominously close. 2030 seems like an extreme, last possible, year. “Black Swan” events could make it at any time before then.

Of course, some unforeseen bonanza such as a new modification of the Fischer-Tropsch process could conceivably make affordable oil out of (cheap) coal (or the reverse, oil out of natgas) worldwidely; but that does not currently seem to be on the horizon. Barring some such miracle by unicorns, the only recourse civilization will have left is more smoke and mirrors (such as government subsidization) to separate the unaware (among them, the taxpayers) from their money. (Never mind the increasing biospheric degradation.) This will perhaps kick the can down the road for a few more months and give the economies-manipulating sanhedrin an extension on its power, but the forces of chaos will not grant it, say, decades.

The self-serving practice of Western rulers of bringing millions of non-White trash into our countries on the pretense of “compassion,” “Christian charity” or some other such brain embolism pushed by their political donors will greatly exacerbate White genosuicidism and substantially accelerate the end of civilization. Whether by war or exhaustion, the end will be the same. This, of course, is the whole aim of the nihilistic sludge now in power in the U.S., the seat of the death cult. The empire’s rulership knows perfectly well where we are ineluctably going as a result of its policies, but could not care less about the future.

Politics conquers rationality every time.

Boat on Tue, 7th Jun 2016 12:55 am

mak

The 4-unit increase to 408 rigs working was bolstered by a 9-unit jump in oil-directed rigs

http://www.ogj.com/articles/2016/06/bhi-us-rig-count-rises-for-first-time-in-2016.html

Notice in my comment I mentioned oil. Unlike you I don’t make shyt up.

Boat on Tue, 7th Jun 2016 1:05 am

The time of the Peak is a function of price, the affordability of which Gail Tverberg has shown to be dependent on debt.

Wrong. The time of the Peak is a function of price for the electric car.

GregT on Tue, 7th Jun 2016 1:08 am

Why not just accept it for what it is Theedrich? Whitey is a genosuicidal, evolutionary dead end. The sooner we wipe ourselves off of the face of the Earth, the sooner the planet can begin to heal.

makati1 on Tue, 7th Jun 2016 1:51 am

Oil is on it’s death bed, but the oily investors don’t want to see or hear it’s dying gasps. I’m glad I have no financial or career interest in its survival. Being an observer, and using these last years as a means to prep for its passing, is enough for me. I sleep well at night. LMAO

Stuifzand on Tue, 7th Jun 2016 4:18 am

“Whitey is a genosuicidal, evolutionary dead end. The sooner we wipe ourselves off of the face of the Earth, the sooner the planet can begin to heal.”

That’s a pretty nihilistic conclusion.

I would say secular-Christian whitey is a genosuicidal dead-end, but not his DNA, the essence. The most glorious manifestation of “whitey” so far was in the days of the Romans. Than a certain (((“Saint Paul”))) arrived in Rome, preaching his slave religion and his bunch managed to make whitey Marxist, although at the time it was a package deal, with a benevolent Supreme Being, an afterlife and a heaven for goodies and a hell for baddies added to the mix, predicting that “the meek shall inherit the earth”.

The consequence was some 1500 years of dark ages where ISIS-style every aspect of life was connected to Jeezass. Then Copernicus entered the scene making a mockery of the idea that the universe was all about planet earth and humans and came up with the “third rock from the sun idea”. Christianity never recovered from that blow and intellectually the scam is dead, apart from an occasional isolated babushka in northern Siberia or redneck in the swamps of Alabama.

This morbid video perfectly illustrates the essence of Christianity and its siren call’s:

https://www.youtube.com/watch?v=uSv4vBcFyvo

Christianity is a war against the essential Darwinian character of life, where you have to fight for everything: women, knowledge, job, real estate, the survival of your company, your town, your nation. Christianity is applied nihilism. It is the embodiment of the desire to escape from it all. Here is my Other Cheek, please hit. Here is my daughter, I am not going to defend her. A corpse on a cross, that’s the perfect symbol for the idiocy.

Way out? Neo-Romanism. If we don’t change our value system Nietzsche-style, we are going to be overrun by those who are completely unable to sustain European civilization and we are going to have at least many millenniums of dark ages, in the most literal sense of the word.

Now I know that the greenies here, the modern day Puritans, are going to applaud that development, after all, what is more desirable than a planet without humans? Count me out.

Let uncle Donald initiate the inevitable breakup of the US so uncle Schmul has no longer a stick to conquer the world with. Watch and learn how much resilience there still is in Europe, under the surface to hit back and drive out Washington’s stadholders, bury the West and start all over again and create the North in strong opposition to the South.

yoshua on Tue, 7th Jun 2016 6:58 am

short, your answer was a little bit over my level of understanding.

But I assume that those 9,2 Quad BTU represents $1,2 trillion in global GDP. The global economy needs 9,2 Quad BTU to generate $1,2 trillion in global GDP.

Those 9,2 Quad consumed by the energy sector showed up as $1,2 trillion in losses somewhere in the general economy and caused the stock market crash and the crash in the oil price at the start of the year to force the high cost producers out of business since they are the cause of these losses.

The energy sector and the general economy live in symbiosis.

marmico on Tue, 7th Jun 2016 7:47 am

It now requires, on average, 34.6% more energy to extract a barrel of oil than it did 11 years ago.

Bull shit. EROI of 11.7 [8.7] calculates as 92.4 [88.5] units of net energy per 100 units of gross or well head energy. The difference in the calcs is 4.1 net per 100 gross units or 4.1%. which is almost an order of magnitude less than 34.6%.

You are a loony bin fuctard.

makati1 on Tue, 7th Jun 2016 8:12 am

marm, you do know that a little knowledge is a dangerous thing?

makati1 on Tue, 7th Jun 2016 8:21 am

In other news: The Us is one step closer to “1984”.

“In the true Orwellian fashion now typifying 2016, a bill to implement the U.S.’ very own de facto Ministry of Truth has been quietly introduced in Congress – its lack of fanfare appropriate given the bill’s equally subtle language.

As with any legislation attempting to dodge the public spotlight, however, the ‘Countering Foreign Propaganda and Disinformation Act of 2016’ marks a further curtailment of press freedom and another avenue to stultify avenues of accurate information.”

Keep the stupid Americans ignorant of the truth while you bleed them dry.

Davy on Tue, 7th Jun 2016 8:36 am

Where is your link Makati Bill? I remember when you were commenting on how much Zero Hedge was a US Ministry of Propaganda source. Now it is you place of choice LMFAO. You didn’t link it because your buddies here don’t like ZH. There is too much anti BRIC stuff for them. ZH sure love Russia so I often wonder why the ZH hate.

Davy on Tue, 7th Jun 2016 8:44 am

Marmico, you are so lame. What oil and where dumbass. Your little snippets of drool are pathetic. If you are going to say something that bold take a couple of paragraphs don’t be intellectually lazy and insert some stupid explatives to try make your point along with unsupported numbers.

Sissyfuss on Tue, 7th Jun 2016 11:59 am

Rocko,your spelling of the word refinery came out as refinertrefinerty in both of your double posts. I believe that was your subconscious telling you the word applicable was FINITE but you refused to acquiesce. This is your oil shrink signing off.

Demand destruction and peak oil

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